Alphabet's earnings report showed that while revenue from its search and other segments grew 12% year-over-year to approximately $63 billion, it fell short of analyst expectations for the second consecutive quarter. This discrepancy is particularly concerning as search query growth reached its highest level in five years, indicating a widening gap between user engagement and revenue generation.
Analysts, including Gene Munster from Deepwater Asset Management, suggest that the rise of AI-powered services could disrupt traditional search, potentially altering the landscape of online commerce. Alphabet attributed the revenue deceleration primarily to foreign exchange impacts, which are expected to worsen in the fourth quarter.
Following the earnings announcement, Alphabet's stock dropped about 10% in after-hours trading, reflecting investor concerns over a negative free cash flow of $9 billion for the quarter, significantly higher than anticipated. Notably, this marked the first time Alphabet reported negative free cash flow since becoming a public company.
Despite these challenges, Alphabet's cloud business showed robust growth, with revenue more than doubling to nearly $31 billion, driven by strong demand for AI infrastructure. However, analysts remain cautious, with UBS and Mizuho highlighting fears that AI could cannibalize revenue from search and YouTube.
As Alphabet continues to invest heavily in AI, including its Gemini model, the company faces the dual challenge of maintaining its search revenue while capitalizing on the growing cloud market